The mortgage lending landscape has changed considerably in the last few years and investment properties qualification is more stringent nowadays. A few years ago, one can qualify for an investment property mortgage with less than 20% downpayment. Nowadays, 20% is the minimum downpayment not to mention the amortization has been reduced to 30 years (Note 35 years amortization is available but at a rate premium).
Understanding how investment properties are qualified with various lenders can sometimes be complex, however here is an explanation to help the first time real estate investor what they are up against. The examples below are based on the following:
- Purchase price: $625,000 (duplex)
- Mortgage: $500,000 (80% LTV)
- Monthly mortgage payment: $2,127 (based on 3.09% amortized over 30 years)
- Monthly rental income: $3800
- Monthly property tax: $275
50% Rule
This is the most penalizing rule used by lenders where it only accounts for 50% of the rental income. Based on the above numbers, the net monthly result is a shortfall of $502 (50% * $3800 - $2127 - $275 = -$502). This figure is added to the liability section of the mortgage application hence reducing applicant's qualification amount.
70% Rule
This is more favourable method, where 70% of the rental income is accounted for. The above example would net in a surplus of $258 which is added to the applicant's income which strengths the mortgage application. At the time of writing this blog post, this method will be scrapped in a few days.
T1 General Line 126
Some lenders allow the applicant to use line 126 in the T1 general for existing investment properties when qualifying for a new property. Typically, real estate investors maximize capital cost allowance (CCA) depreciation and expense deduction to show a loss. This might be advantageous from a taxation perspective, however the negative figure on line 126 would be added to the liability section of the mortgage application. Having a positive line 126 figure would strengthen the application since it is added as income (Disclaimer: Please consult a professional accountant to provide tax advice as I am licensed a mortgage broker only).
Rental Surplus/Shortfall
A calculator is used with set figures for vacancy, repairs & maintenance, insurance and management. This is the most favourable method as it nets $638 monthly which is added to the applicant's income.
If a real estate investor is buying a home to for personal occupancy, the above methods are used by lenders in assessing the the applicant's qualification. Qualifying for a mortgage when one owns an investment property can be a daunting task and stressful. It is important to work with a mortgage professional who is well versed in investment property qualification guidelines to avoid future disappointments. How would one feel if they can't buy their dream family home because they own one or two investment properties?
To avoid disappointment in buying your family home or investment property, please contact Nawar.
